Taleb Was Right. We’re Still Fooled by Randomness

Bloomberg - Are you a robot?

 

Another piece of research showing passive is the way to go.
Is there any research / write ups out there showing us that active is the way to go?

There seems to be write up after write up showing passive outperforms in the majority. Not so much from the active players arguing there case.

I guess that might be because you can’t argue with the facts.

 

I would be interested in data that broke up out performance. Marks suggested that the biggest out performers had less chance of continuing where as those that only just outperformed might be more likely to be able to repeat in subsequent years.

Still we know its a tough game.

Plenty, they just all happen to be selective with certain facts.

 

What would be interesting to know is how active performs against passive if the following conditions were met.

1) They were low cost almost comparable to passive
2) They followed value investing principle so become greedy when others were fearful and fearful when others were greedy
3) Invested for the long term (avoid trading)

Now any study on the above would be interesting to see how it fared against passive.

Cheers,
Oracle.

 

We may be fooled by randomness but me thinks the author of the article is fooled by stupidness.

Far from me to defend active, as I believe the math is indisputable, On average Active will underperform passive by the amount of costs that the active community generates/incurs.

But the chart is also misleading because any Active Manager that has the skills to outperform and the integrity to be upfront with how outperformance can be achieved in the long term will tell you SUCK IT UP princess, if you want a chance at long term out-performance you must be prepared to wear periods of underperformance. Portraying active management as a failure because they can’t achieve consistent outperformance is……either talking an agenda or naive.

Most punters couldn’t stick with an outperforming manager or process anyway and that is where the chart is relevant. Return chasing is really stupid – but the chart doesn’t really tell you much about true viability of long-term active management – simple math does though, Some will succeed if on nothing more than randomness, some may even do it with skill, but all that succeed will most likely have to weather a bumpy ride.

 

Whilst on the subject here’s the latest SPIVA report (end 2018) just released:

https://us.spindices.com/documents/spiva/spiva-australia-year-end-2018.pdf?force_download=true

 

This is a chart of the SPIVA table you posted @ Nodrog



Variability across the readings but no discernible trend over time. i.e No trend that more managers underperform on a 15-year time frame than they do on a 1-year time frame. With out this trend its reasonable to conclude roughly the same number will be under/over performing over a 20, 30, 50-year timeframe etc.

The first article you posted obviously tried to paint a different picture, which was my gripe with it.

Interestingly if you average the readings in the chart you get 78.5% of mangers underperforming. Seems the old Pareto 80/20 principle rears its head again.

Whether the 20% are skilful or lucky is an interesting question? How you identify them in advance is also an interesting question? And how you match the right manager to "your" time frame is also a predicament because the manager who outperforms over 20 years could easily be an underperformer over 10 which will stuff you up if you need the money in 10years.

 

Thanks for your analysis / thoughts @dunno. Always appreciated.

With things like this I’m just the messenger so happy to hear all different viewpoints.

Agree with you on judging an outcome based on a three year performance period is nonsensical for longer term investors. Still I was surprised that after three years only 1% were outperforming their benchmark.

From memory the data and methodology used to compline the SPIVA reports is quite sound.

For retail investors in particular trying to pick a Mgr that will outperform the index in the timeframe relevant to an investor’s needs appears to be very difficult to say the least.

But as you stated if one has a belief in a strategy / Mgr he / she needs to be prepared to stick with it rather than jumping from one fund to another based on shorter term outcomes.

The same also applies to rule based “factor” strategies such as value, momentum etc.

I often wonder whether others get bored with me periodically posting this sort of stuff as the conclusion is generally the same. Hopefully it contributes to keeping the forum more active without being perceived as a waste of space.

 

A vote for keep posting

 

Keep it up

 

Nassim has a very good quote ..
Over the long term ,you are more likely to fool yourself than others..

 

Whilst not a fund manager in the the traditional sense, would investment house W H Soul Pattinson meet the requirements? They like investing in low cost operations and have a lean management structure. They follow Graham’s value investing principles and they invest for the long term? And better than Buffett they have paid an ever increasing dividend to their shareholders.

 

I believe SOL moves into the ASX 100 this month. That is a bit of a big deal!

 

And in the US



S&P Dow Jones Indices, the “de facto scorekeeper of the active versus passive investing debate,” recently released its“SPIVA U.S. Year-End 2018” report.

Here are some highlights of the 2018 Year-End SPIVA US Scorecard (bold added):

• Amid the market volatility, 2018 was the fourth-worst year for U.S. equity managers since 2001; 68.83% of domestic equity funds lagged the S&P Composite 1500 during the one-year period ending Dec. 31, 2018.
• For the ninth consecutive year, the majority (64.49%) of large-cap funds underperformed the S&P 500. The figures highlight that heightened market volatility does not necessarily result in better relative performance for active investing.
• Similarly, small-cap equity managers found it more challenging to navigate 2018’s market environment compared with 2017’s range-bound market movements; 68.45% of all small-cap funds lagged the S&P SmallCap 600 over the one-year horizon. Underperformance was particularly noticeable in the small-cap value (83.33%) and small-cap core (87.55%) categories.
• Over the long-term investment horizon, such as 10 or 15 years, 80% or more of active managers across all categories underperformed their respective benchmarks.
• Over the most recent 15-year investment horizon, 91.62% of large-cap managers, 92.71% of mid-cap managers, and 96.73% of small-cap managers failed to outperform their benchmarks on a relative basis (see table above).

Here’s a golf analogy from Burton Malkiel:

It’s true that when you buy an index fund, you give up the chance to boast at the golf course that you picked the best performing stock or mutual fund. That’s why some critics claim that indexing relegates your results to mediocrity. In fact, you are virtually guaranteed to do better than average. It’s like going out on the golf course and shooting every round at par. How many golfers can do better than that? Index funds provide a simple low-cost solution to your investing problems.

 

This is where ASX small caps is an outlier in the world of indexing compared to many other markets. Although more likely to do with the makeup of the index than skill of the Mgrs,

 

I would have thought it's probably the lack of intense competition that allows managers to buy investable companies at reasonable prices and thus outperform the benchmark. Once competition heats up which it will eventually once it becomes common knowledge that small cap sector is easy to outperform the benchmark. We will see more and more managers competing against each other for the same stocks and any alpha would eventually be lost. That's what happens in large cap market.

Cheers,
Oracle.

 

Low cost and importantly minimal risk which decreases the longer you hold.

Index hugging doesn't aim for birdies. You won't hit into the rough, as often. One thing I clearly remember a pro telling me was that a par 5 can be generally reached with 3 shots of a 5 iron. As soon as you pull out your big bertha driver you are drastically raising risk. Then again, golf is about fun and there's no sweeter feeling than cracking one down the middle - investing should be based purely on objective decision making.

 

One of the driving points of Taleb's book. Reading it now for the first time ... Really enjoying it although if feels a little bit hard following his points sometimes due to his ad-hoc ramblings...

 

Write up here also

Almost every Australian equity fund lagged the market last year

Almost nine in 10 actively managed mainstream Australian equity funds failed to beat the market last year, according to the latest figures from S&P Dow Jones Indices.

The SPIVA scorecard is promoted by S&P as the "de facto scorekeeper of the ongoing active versus passive debate", and surveys performance of active fund managers against the benchmark for a range of countries.

The results are less than flattering for Australia's professional funds management industry, at least for those who claim to be able to add value by picking stocks and charge fees for that skill.

Among "general" actively managed Australian share funds, which are benchmarked against the broadest S&P/ASX 200 index, the S&P analysis found 87 per cent failed to beat the market in 2018.

That was worse than the previous year's outcome, when 59 per cent lagged the ASX 200. Only once in the past five years did this category of active managers beat the market: in 2015, when only 36 per cent underperformed.

Reflecting this poor outcome, the average general Aussie equity fund on an asset-weighted basis and after fees lost 5.8 per cent in 2018 against the ASX 200's fall of 2.8 per cent.

Mid- and small-cap funds fared better, but still 52 per cent underperformed in 2018, 74 per cent lagged in 2017 and 82 per cent in 2016. In 2014 and 2015, however, only about a quarter failed to beat their benchmarks.

The average fund in this peer group – again, on an asset-weighted basis – managed to outperform the relative benchmark, albeit by losing only 7 per cent against the mid-small cap index's 8 per cent drop.

 

Don’t I know it. I was invested in 9 of those 10 fund managers that underperformed.